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Best Buy Mobile Beating Expectations

Best Buy’s wireless operation,
developed with and co-owned
by European partner Carphone
Warehouse (CPW) , had a
“transformational year” in which
cellphone activations rose more
than 30 percent to 5.5 million
for the 12 months, ended April
3, suggesting a 4 percent to 5
percent share of all U.S. handset
sales for the period, CPW said.

What’s more, earnings before
interest and taxes (EBIT)
for Best Buy Mobile soared 475
percent to $71 million over the
same 12-month period.

In a fourth-quarter earnings
announcement last month that
shed light on both the mobile
unit and Best Buy’s new “connected
world” strategy, CPW chairman
Charles Dunstone noted,
“Best Buy Mobile U.S. is outperforming
even our expectations”
thanks to strong sales and operational
efficiencies.

The freestanding stores and
wireless departments, which first
appeared in 2006, are differentiated
by their full carrier offering, a knowledgeable — and impartial —
non-commissioned sales staff, and a
simplified customer experience.

EBIT is expected to grow at a more
moderate 15 percent to 20 percent pace
during the current fiscal year as Best
Buy Europe, the joint retail venture
that runs Best Buy Mobile, continues
to invest in online operations and standalone
stores.

Indeed, Best Buy CEO Brian Dunn
told The Financial Times last month
that the partners may eventually open
as many 1,000 freestanding Mobile
stores across the U.S. in pursuit of their
long-term goal of a 15 percent share of
the domestic wireless market.

There are currently 1,147 Best Buy
Mobile sites throughout the U.S.,
representing an 8 percent uptick during
CPW’s Apri l-through-March
fiscal year. The locations are comprised
of 1,070 departments within all Best
Buy flagship stores (up 4.6 percent year
over year), and 77 stand-alone stores,
which is nearly double the 2009 count.

In its own fourth-quarter earnings announcement,
Best Buy said it planned to
open between 75 and 100 small-format stores during its current fiscal year, comprised
mostly of Mobile stores. Chief
financial officer Jim Muehlbauer told
analysts during a recent conference call
that the 1,500-square-foot shops —
located in high-traffic areas like shopping
malls and focused on selling “margin-
rich” connections for wireless devices
— generate greater margin per square
foot than Best Buy’s big-box locations.

The freestanding stores also attract a
different customer base, notably women,
so that “the vast majority” of Mobile
sales are incremental and do not can- nibalize the company’s flagship stores,
Dunn noted during
the call.

A key profit
driver for both the
freestanding and
in-store shops is
the dramatic adoption
rate of smartphones,
which will
represent about 83
percent of all cellphones
by 2013,
CPW projected.
The average revenue
generated by a
smartphone activation
is presently 3 percent
higher than that
of non-smartphones,
the U.K.-based wireless
retailer reported,
while Geek Squad
service attachments
rates are 44 percent
for smartphones vs.
35 percent for nonsmartphones,
and attachment rates of
accessories are 36 percent for smartphones,
compared with 14 percent for
less sophisticated handsets.

Some analysts believe the strong results
generated by Best Buy Mobile, and
the current glut of cheap retail space,
should put to rest rumors that chief executives
Dunn and Dunstone are planning
to purchase RadioShack, which is
similarly shifting to a mobility and connectivity-
centric strategy.

Meanwhile, CPW provided a preview
of what Best Buy stores, or at least
the center of their sales floors, may look
like in the coming months and years.
CPW’s Wireless World chain, which
includes 29 stores in the U.K. and seven
in Spain, is the embodiment of the
“connected world” strategy, espoused by
both partners, in which CE hardware
serves as the foundation for sales of accessories,
subscriptions and services.

Elements of the Wireless World format
will likely be incorporated into
“connectivity centers” in the middle of
Best Buy’s stores that will supplant slowturning
entertainment software with
bundled content solutions, including
mobile and wireless broadband services
and streaming content. Dunn acknowledged
that various components are now
being tested at Wireless World stores in
the U.K., and that the centers will serve
as a “stage” in which “hardware is really
the starting point, not the end.”

For its part, CPW expressed confidence
that its Wireless World format is
working, as it “stretches the brand to incorporate
all things connected” and prepares
to open more than 64 new stores
over the next 12 months.

Separately, Best Buy and CPW
opened the first big-box Best Buy store
in the U.K. last week. The 50,000-
square-foot unit, located in East
London, is the first of eight to 10 largeformat
stores planned for the British
Isles this year and 60 to 150 envisioned
for the future.